Case Law Details
Krishnakan Sharma Vs ITO (ITAT Mumbai)
In a significant ruling for urban re-development projects, the Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has declared “hardship compensation” received by flat owners from developers as a capital receipt, thereby exempting it from income tax. The decision, pronounced on April 4, 2025, in the case of Krishnakan Sharma versus the Income Tax Officer (ITO), consolidates the tax position on such payments, which are common in Mumbai’s extensive re-development landscape.
The appeal by Krishnakan Sharma challenged an order from the National Faceless Appeal Centre, Delhi (CIT(A)), which had upheld the Assessing Officer’s (AO) decision to treat the hardship compensation as taxable income for the assessment years 2011-12 and 2012-13.
Procedural Hurdle and Condonation of Delay
At the outset, the ITAT addressed a procedural delay in filing the appeals. Krishnakan Sharma’s legal team submitted an affidavit explaining the delay, which the Tribunal, after careful consideration, decided to condone. Citing the established principle from the Hon’ble Supreme Court in Land Acquisition Collector Vs. Mst. Katiji & Ors., [1987] AIR 1353 (SC), the ITAT emphasized that “where substantial justice is pitted against technicalities of non-deliberate delay, then in that eventuality substantial justice is to be preferred.” The Tribunal deemed the assessee’s explanation justifiable and liberally construed the term “sufficient cause,” allowing the appeals to be heard on their merits.
The Core Dispute: Taxability of Hardship Compensation
The central grievance of the assessee revolved around the CIT(A)’s confirmation of the AO’s addition, which treated the hardship compensation received as income.
The facts of the lead case, which the ITAT applied mutatis mutandis to Krishnakan Sharma’s appeals, involved an individual, Kunnama V Balakrishnan, a retired person, who had a flat in the MIG Co-operative Housing Society Ltd, Bandra (East). As part of a re-development agreement dated October 31, 2010, the assessee received ₹25,21,508 from the developer, M/s. DB-MIG Realtors and Builders Pvt. Ltd., explicitly termed “Hardship Compensation.” This payment was made in exchange for surrendering the old flat, with the promise of receiving a new flat upon completion of the re-development.
The Assessing Officer (AO) took the view that this payment was taxable. The AO noted that the housing society owned the flats and had entered into the re-development agreement. The AO contended that the society’s action of receiving funds from the developer and then diverting them to individual members like the assessee was not in accordance with the “Principle of Mutuality” (which applies to transactions among members of a mutual association) because the payment originated from a third party (the developer). The AO characterized this as a “purely commercial activity” and concluded that the “hardship compensation” was akin to a dividend distributed by the housing society, thereby treating it as a revenue receipt taxable under “income from other sources.” The CIT(A) subsequently confirmed this assessment.
Assessee’s Contention: Capital Receipt
The assessee consistently argued that the amount received was a capital receipt, not liable to tax. The “Hardship Compensation” was paid due to the displacement of the flat occupants, a form of rehabilitation allowance necessitated by the re-development. From the assessee’s perspective, this compensation directly related to the capital asset (the flat) and therefore assumed a capital character.
ITAT’s Adherence to Judicial Precedent
The ITAT, in its detailed analysis, found the issue to be squarely covered by a previous decision of its own Co-ordinate Bench in Kunnama V Balakrishnan Vs. ITO (ITA No. 2577/Mum/2023). The operative portion of this earlier order, which mirrors the arguments and findings in Krishnakan Sharma’s case, formed the basis of the present ruling.
In the Kunnama V Balakrishnan case, the Tribunal had extensively relied on its prior ruling in Kushal K. Bangia v ITO (2012) 50 SOT 1/18 taxmann.com 31. The principles established in Kushal K. Bangia were pivotal:
1. Capital Receipts vs. Revenue Receipts: The Tribunal reiterated that only capital receipts specifically made taxable by the Income Tax Act can be considered “income.” A capital receipt, simpliciter, is outside the scope of taxable income. This fundamental distinction was underscored by the Supreme Court’s observation in Padmraje R. Kardambande vs CIT (195 ITR 877), which stated that amounts regarded as capital receipts are “not income within meaning of section 2(24) of the Income Tax Act.”
2. Burden of Proof on Revenue: The ITAT reaffirmed the legal position that the burden lies with the revenue to establish that a receipt is of a revenue nature. If the revenue fails to do so, the receipt cannot be taxed as income. This principle, articulated by the Supreme Court in Dr. George Thomas K vs CIT (156 ITR 412), places the onus squarely on the tax department.
3. Nature in Receiver’s Hands: Critically, the Tribunal emphasized that the nature of the payment in the hands of the payer does not determine its nature in the hands of the recipient. Drawing on the Supreme Court’s ruling in CIT vs. Kamal Behari Lal Singha (82 ITR 460), the ITAT asserted, “it is now well settled that, in order to find out whether it is a capital receipt or revenue receipt, one has to see what it is in the hands of the receiver and not what it is in the hands of the payer.” This directly countered the AO’s argument that the payment was a “commercial activity” from the developer’s perspective.
4. Reduction of Cost of Acquisition: While holding the hardship compensation as a capital receipt and thus not taxable income, the Tribunal made an important observation, which was also agreed upon by the assessee’s counsel in Kushal K. Bangia. The amount received as compensation for displacement would, in future, be taken into account to reduce the cost of acquisition of the flat, specifically when the occasion arises for computing capital gains on the sale of the asset. This ensures that while not taxed immediately, the capital nature of the receipt is acknowledged for future tax calculations.
The ITAT also specifically addressed and rejected the AO’s and CIT(A)’s reliance on the Supreme Court case of M/s. Bangalore Club v CIT 156 Taxman 323, finding it irrelevant to the issue of hardship compensation and its characterization.
Conclusion and Impact
In light of the detailed discussions and by respectfully following the consistent decisions of the Co-ordinate Benches, the ITAT concluded that the “Hardship Compensation” received by Krishnakan Sharma, in terms of the re-development agreement, was undeniably a capital receipt. It was paid as compensation for displacement and hardship faced by the flat owners due to the re-development, not as a revenue earning. Therefore, it falls outside the ambit of “income” as defined under Section 2(24) of the Income Tax Act.
The Tribunal’s decision ensures that such compensation, while not directly taxable upon receipt, will adjust the base cost of the property for future capital gains calculations. This ruling brings clarity and consistency to the tax treatment of hardship compensation in re-development scenarios, offering significant relief to numerous flat owners undergoing similar re-development processes across urban centers.
Both appeals filed by Krishnakan Sharma for assessment years 2011-12 and 2012-13 were consequently allowed, aligning the current judgment with previous rulings on the matter and reinforcing the principle of judicial consistency.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
These two appeals have been filed by the assessee challenging the impugned order 06.12.2023 passed u/s 250 of the Income Tax Act, 1961 (‘the Act’), by the National Faceless Appeal Centre, Delhi / Ld. CIT(A) for the A.Ys 2011-12 & 2012-13.
Since all the issues involved in two three appeals are common and identical, therefore, they have been clubbed, heard together and consolidated order is being passed for the sake of convenience and brevity. We shall take ITA No. 417/Mum/2025, A.Y 2011-12 as lead case and facts narrated therein.
2. At the very outset, it is noticed that there is a delay in filing the present appeals and in this regard an affidavit has been filed by the assessee Therefore, after hearing the parties on condonation of delay and after going through the contents of the affidavit and keeping in view, the principles laid down by Hon’ble Supreme Court in the case of Land Acquisition Collector Vs. Mst. Katiji & Ors., [1987] AIR 1353 (SC), wherein it has been held that where substantial justice is pitted against technicalities of none deliberate delay, then in that eventuality substantial justice is to be preferred. In our view the principle of advancing substantial justice is of ‘prime importance’. Hence considering the fact that the assessee has justifiably and property explained the delay which occurred in filing the appeal, the expression ‘sufficient cause’ is being liberally construed, therefore we are inclined to condone the delay in filing the appeal and heard on merits.
3. Now, as far as the merits of the case is concerned. It is noticed that the main grievance of the assessee is against the action of Ld. CIT(A) in confirming the additions made by AO by treating the amount of ‘hardship compensation’ received by the assessee as income.
4. In this regard, after hearing both the parties at length we found that the issue in question is squarely covered by the decision of the Coordinate Bench of ITAT in ITA No. 2577/Mum/2023, in case titled Kunnama V Balakrishnan Vs. ITO, the operative portion is reproduced here in below:
3. Brief facts are that the assessee is an individual (Retired Person) who has filed her return of income on 26.07.2011, declaring total income of Rs. 1,12,913/- for AY 2011-12. Later, the case of the assessee was reopened u/s 147 of the Income Tax Act, 1961 (hereinafter “the Act”) for the reason that even though assessee received Rs.25,21,508/- from developer/builder M/s. DB-MIG Realtors and Builders Pvt. Ltd. (hereinafter “Builder”) have not offered for tax the said receipt, which according to the AO escaped assessment. The assessee replied to the AO that she had a flat (C- 12/96) in the residential society [MIG Co-operative Housing Society Ltd, Bandra (East)] and as per terms of the re-development agreement dated 31.10.2010, she received Rs.25,21,508/- from the developer/builder as “Hardship Compensation”. According to the assessee, the amount received from the builder was capital receipt and therefore not liable to be tax. However, the AO did not agree. He noted that assessee was a member of the housing society, and that the society was the owner of the properties (flats); and it had entered into agreement for development of the property with the builder vide agreement dated 31.10.2010 and by virtue of such an agreement with the developer for re-developing the property, each member of the society received a new flat in exchange of surrender of old flat. The AO noted the terms of agreement at para no. 6 of his order and further noted that on surrender of flats by members, builder had issued cheque in the name of the member (including assessee) which were handed over to the assessee through the society. According to the AO, thus housing society received total amount of Rs.149.89 crores, which were in-turn, handed over to the individual members as per the re-development agreement. This action of the housing society handing over payment from builder to the individual member/assessee was not in accordance with the “Principle of Mutuality” since the same was received from the developer (a third party); and further described the transaction in his own words “Hence, the activity of entering into an agreement for re-development of the property and receipt of consideration by the society and diverting of the same at source to the individual members is purely a commercial activity”. Therefore, he was of the opinion that amount given to the assessee (hardship compensation) is akin to dividend distributed by the housing society and therefore, its character is revenue in nature. And therefore, he added the same i.e. Rs.25,21,508/- as revenue receipt in the form of dividend under the head “income from other sources”. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who confirmed the action of the AO. Aggrieved, the assessee is before us.
4. We have heard the Ld. DR and perused the records. We note that the assessee was a resident of flat being member of the housing society (supra), who received Rs.25,21,508/- from the developer as “Hardship Compensation” in terms of the re-development agreement dated 31.10.2010, by which the flat occupied by assessee was surrendered and handed over to builder for re-development, and would receive new flat over and above the hard-ship compensation paid to assessee. As per the terms of re-developed agreement, the assessee received the “Hardship Compensation” to the tune of Rs.25,21,508/- which was issued by developer in the name of the member/assessee of the housing society which receipt according to the AO was in the nature of “dividend” from the housing society and therefore, revenue in nature and so he added it under the head “income of other sources”. According to the assessee, the amount received i.e. Rs.25,21,508/- received from the developer as Hardship Compensation on account of re-development was in the nature of capital receipt and not as such taxable in the hands of the assessee. According to assessee, since the compensation received by assessee was towards displacement in terms of the re-development agreement; and the compensation was paid by the builder on account of hardship faced by the owner of the flat due to displacement of the occupants of the flat, it is nothing but rehabilitation allowance and constitutes capital receipt as the property has gone into re-development. For such a contention, assessee had relied on the judicial precedent/decision of this Tribunal in ITA. No.2349/Mum/2011 in case of Kushal K. Bangia v ITO (2012) 50 SOT 1/18 taxmann.com 31 wherein Tribunal has held as under: –
“3. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
4. In our considered view, it is only elementary that the connotation of income howsoever wide and exhaustive, take into account only such capital receipts are specifically taxable under the provisions of the Income tax Act. Section 2(24)(vi) provides that income includes “any capital gains chargeable under section 45”, and, thus, it is clear that a capital receipt simplicitor cannot be taken as income. Hon’ble Supreme Court in the case of Pad mraje R. Kardambande vs CIT (195 ITR 877) has observed
that “…, we hold that the amounts received by the assessee during the financial years in question have to be regarded as capital receipts, and, therefore, (emphasis supplied by us), are not income within meaning of section 2(24) of the Income tax Act….” This clearly implies, as is the settled legal position in our understanding, that a capital receipt in principle is outside the scope of income chargeable to tax and a receipt cannot be taxed as income unless it is in the nature of revenue receipt or is brought within the ambit of income by way of a specific provision in the Act. No matter how wide be the scope of income u/s.2(24) it cannot obliterate the distinction between capital receipt and revenue receipt. It is not even the case of the Assessing Officer that the compensation received by the assessee is in the revenue field, and rightly so because the residential flat owned by the assessee in society building is certainly a capital asset in the hands of the assessee and compensation is referable to the same. As held by Hon’ble Supreme Court, in the case of Dr. George Thomas K vs CIT(156 ITR 412), “the burden is on the revenue to establish that the receipt is of revenue nature” though “once the receipt is found to be of revenue character, whether it comes under exemption or not, it is for the assessee to establish”. The only defence put up by learned Departmental Representative is that cash compensation received by the assessee is nothing but his share in profits earned by the developer which are essentially revenue items in nature. This argument however proceeds on the fallacy that the nature of payment in the hands of payer also ends up determining it’s nature in the hands of the recipient. As observed by Hon’ble Supreme Court in the case of CIT vs. Kamal Behari Lal Singha (82 ITR 460), “it is now well settled that, in order to find out whether it is a capital receipt or revenue receipt, one has to see what it is in the hands of the receiver and not what it is in the hands of the payer”. The consideration for which the amount has been paid by the developer are, therefore, not really relevant in determining the nature of receipt in the hands of the assessee. In view of these discussion, in our considered view, the receipt of Rs. 11,75,000 by the assessee cannot be said to be of revenue nature, and, accordingly, the same is outside the ambit of income under section 2(24) of the Act. However, in our considered opinion and as learned counsel for the assessee fairly agrees, the impugned receipt ends up reducing the cost of acquisition of the asset, i.e. flat, and, therefore, the same will be taken into account as such, as and when occasion arises for computing capital gains in respect of the said asset. Subject to these observations, grievance of the assessee is upheld.
5. In the result, the appeal is allowed in the terms indicated above.
5. Per-Contra, the Ld. DR relied on the order of the Ld. CIT (A)/AO, however, could not controvert the fact that the assessee received of Rs.25,21,508/- from Builder in terms of the re- development agreement and such compensation was paid by the builder on account of hardship faced by the owner of the flat due to displacement of the occupants of the flats, which payment is in the nature of hardship allowance/rehabilitation allowance. This compensation was over and above the exchange of old flat with new flat. In such a scenario, the amount of Rs.25,21,508/- received by the assessee, as compensation for displacement in terms of re-development agreement is not a revenue receipt and constitute capital receipt, as the property has gone into re-development. We find that the issue as to whether the hardship compensation received by the assessee from builder in terms of the re-development agreement is no longer res- integra and we find that Co-ordinate Bench of this Tribunal in the case of Kushal K. Bangia (supra) have answered the question in favour of the assessee by holding it to be capital receipt not liable to tax. We find that the issue involved in the instant case is squarely covered by the decision of the Tribunal (supra) and therefore, we are of the opinion that “Hardship Compensation” given to the assessee pursuant to the re-development agreement is a capital receipt and cannot be treated as revenue receipt as held by the AO/Ld. CIT(A). The reliance placed by AO/Ld. CIT(A) on the case law of the Hon’ble Supreme Court in the case of M/s. Bangalore Club v CIT 156 Taxman 323 is not relevant on the issue in hand. Therefore, the AO/Ld. CIT(A) erred in law holding that hardship compensation received by the assessee from the builder was in nature of the dividend in the hands of the assessee/ member of the housing society. In the light of the aforesaid discussion, we are of the considered view that receipt of “Hardship Compensation” of Rs.25,02,508/- cannot be said to be of revenue nature and accordingly the same is outside the ambit of income u/s 2(24) of the Act. However, in the case of Kushal K. Bangia (supra) as well as in the case of Jitendra Kumar Soneja v ITO, Ward-6(3) (3) (2016) 161 ITD 269 (Mum), the Tribunal has observed in similar case that the impugned receipt ends up reducing the cost of acquisition of the asset, i.e. flat, and therefore the same will be taken into account when occasion arises for computing capital gains in respect of said. Subject to these observation, the appeal of assessee is allowed.
5. Since the facts of the present case are similar to the facts in the case of Kunnama V. Balakrishna Vs ITO (supra) therefore, keeping in view the principles of judicial consistency and judicial discipline and while following the decision of the coordinate bench, we give the same directions in the present case as well.
ITA No. 418/Mum/2025, A.Y 2017-18
6. As the facts and circumstances in these appeals are identical to ITA No 417/Mum/2025 for the A.Y 2011-12 (except variance in figures) and the decision rendered in above paragraph would apply mutatis mutandis for this appeal also. Accordingly, the grounds of appeal of the present appeal also stands allowed.
7. In the result, both the appeals filed by the assessee are allowed.
Order pronounced in the open court on 04.04.2025.
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